The UK s most comprehensive and integrated provider of veterinary services to animal owners

Transcription

1 CVS Group plc Annual Report for the year ended 30 June

2 The UK s most comprehensive and integrated provider of veterinary services to animal owners 298 veterinary surgeries, 5 diagnostic laboratories, 4 pet crematoria and an on-line dispensary. In the past year, we have made excellent progress in all divisions. We have continued with strong organic growth and this has been enhanced by further acquisitions.

3 OVERVIEW ANNUAL REPORT HIGHLIGHTS CVS REVENUE 167.3m +17.0% OPERATING PROFIT 9.8m +29.8% OVERVIEW highlights 1 CVS at a glance 2 Our business model 4 Our strategy 5 OVERVIEW Year in review 6 Our business Chairman s statement 12 STRATEGIC REPORT ADJUSTED EBITDA 1 PROFIT BEFORE INCOME TAX Business review 14 Key performance indicators m +25.9% 4 8.5m +34.8% 4 Principal risks and uncertainties 19 Finance review GOVERNANCE Board of Directors Corporate governance statement 25 Remuneration Committee report 28 Directors report 32 ADJUSTED PROFIT BEFORE INCOME TAX m +28.6% 4 PROPOSED DIVIDEND PER SHARE p 3.0p +20.0% 4 FINANCIAL STATEMENTS Independent auditors report 34 Consolidated income statement Consolidated statement of comprehensive income 35 Consolidated and Company balance sheets Consolidated statement of changes in equity Company statement of changes in equity 38 Consolidated and Company cash flow statement 39 Notes to the consolidated financial statements 40 ADJUSTED EARNINGS PER SHARE 3 p BASIC EARNINGS PER SHARE p Five-year history 63 Contact details and advisors p +30.0% p +39.8% Read more in our financial review on pages 21 to 23 1 Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is profit before income tax, net finance expense, depreciation, amortisation and costs relating to business combinations. The definition of the adjusted EBITDA measure has been revised since that previously reported in the 30 June consolidated financial statements. Adjusted EBITDA is now stated after share-based payments for consistency with the adjusted earnings per share calculation. The comparative information has been restated. 2 Adjusted profit before income tax is calculated as profit on ordinary activities before amortisation, taxation and costs relating to business combinations. 3 Adjusted earnings per share is calculated as adjusted profit before income tax less applicable taxation divided by the weighted average number of Ordinary shares in issue in the period. 4 Percentage increases have been calculated throughout this document based on the underlying values. Find out more on-line 1

4 CVS OVERVIEW CVS AT A GLANCE ANNUAL REPORT At the heart of our business The Group has four main divisions: veterinary practice, laboratory, crematoria and Animed Direct, our on line business. VETERINARY PRACTICE DIVISION LABORATORY DIVISION 298 SURGERIES 764 VETS 1,116 NURSES 213,000 HEALTHY PET CLUB ( HPC ) MEMBERS Our Veterinary Practices Division includes first-opinion practices and four referral practices providing first-class specialist treatment. We treat small companion animals, equine and large animals. Read more on our veterinary practices on page 8 5 LABORATORIES 368,000 TESTS 172 STAFF 31 PATHOLOGISTS Our laboratories provide diagnostic services to CVS veterinary practices and third parties. Read more on our laboratories on page 9 CREMATORIA DIVISION ANIMED DIRECT 4 CREMATORIA 68,000 CREMATIONS 26 ACRES OF CEMETERIES AND MEMORIAL GARDENS Our crematoria provide pet cremation services to veterinary practices and directly to pet owners. 322,000 CUSTOMERS 4,200 PRODUCT LINES Our on-line business was established in 2010 and has grown rapidly. Read more on our crematoria on page 10 Read more on Animed Direct on page 11 2

5 OVERVIEW OUR NATIONAL COVERAGE Our vision is to continue to be the largest and most comprehensive provider of veterinary services to pet owners in the UK. SURGERIES 298 LABORATORIES 5 31 SCOTLAND AND NORTH EAST CREMATORIA 12 YORKSHIRE NORTH WEST 26 EAST MIDLANDS 24 WEST MIDLANDS 37 3 EAST OF ENGLAND SOUTH WEST AND WALES 2 LONDON 109 SOUTH EAST 1 1 3

6 CVS OVERVIEW OUR BUSINESS MODEL ANNUAL REPORT What sets us apart BUSINESS MODEL COMPONENTS Our vision is to continue to be the most comprehensive and integrated provider of veterinary services to animal owners in the UK, whilst providing growing returns to our shareholders. We continue to deliver our vision through like-for-like growth and the acquisition of veterinary practices, diagnostic laboratories and pet crematoria. Our business model focuses on creating value through the provision of integrated services and the best customer care. GEOGRAPHIC COVERAGE We have 298 surgeries, five laboratories and four crematoria providing coverage across England, Scotland and Wales PASSIONATE PEOPLE We employ dedicated and trained professionals who are committed to excellent clinical care GEOGRAPHIC COVERAGE HIGH QUALITY CLINICAL CARE AND FACILITIES CUSTOMER FOCUS CVS PASSIONATE PEOPLE All of our practices are registered with the RCVS Practice Standards Scheme and are committed to investing in and using modern diagnostic techniques INTEGRATED SERVICES FINANCIAL STRENGTH HIGH QUALITY CLINICAL CARE AND FACILITIES We deliver first-opinion consultations, laboratory diagnostic testing, complex referral procedures, out-of-hours services and cremations INTEGRATED SERVICES FINANCIAL STRENGTH We continue to deliver growth in revenues, profits, earnings per share and operating cash generation CUSTOMER FOCUS Our staff are dedicated to providing quality service with the highest levels of customer care 4

7 OVERVIEW ANNUAL REPORT OUR STRATEGY CVS Progressing towards our goals OVERVIEW OUR STRATEGY OUR PERFORMANCE OUR FOCUS EXCELLENT CUSTOMER SERVICE AND CARE We employ recognised specialists, including 17 diploma holders and ten board-eligible vets We recruited 106 graduate vets in the last two years We launched MiNurse Academy in January We employ 31 clinical pathologists in our Laboratory Division Customer service is one of our core values. It underpins all of our training and development Clinical development remains a core aspect of our training We develop our managerial and operational abilities through programmes such as our Aspirational Leadership and LEAP programmes MEETING ALL OF OUR CUSTOMERS NEEDS We own 298 surgeries, five laboratories and four crematoria across the UK There are 213,000 members of our HPC scheme We invested 4.7m in new premises and equipment We operate four specialist referral centres, with the fifth due to open in October We opened another out-of-hours centre during the year Continue to deliver fast and efficient laboratory testing, using in-house analysers at our practices and advanced testing at our diagnostic laboratories Development of additional complex testing capability at our diagnostic laboratories Development of further capacity in our crematoria business Expansion of our own out-of-hours centres, thereby reducing reliance on third-party providers Development and expansion of our MiPet brand of products EXPANDING OUR BUSINESS THROUGH ACQUISITIONS 29 surgeries acquired during the year Eight surgeries acquired since the year end, including a referral centre One crematorium acquired during the year The opportunity for growth and consolidation is significant We aim to continue to grow our business through acquisitions We will consider acquisitions of small, large animal and equine surgeries. We will also consider acquisitions of crematoria and laboratories where they fit a geographical or knowledge gap BUILDING ON OUR STRENGTHS TO PROVIDE SERVICES TO EXTERNAL PRACTICES Our laboratories performed 368,000 tests in, of which 266,000 were for third parties Our crematoria performed 68,000 cremations, of which 36,000 were for third parties Five new own brand MiPet products launched, available through HPC and MiVetClub Development of external sales of our laboratory analyser units will be an increasing focus MiVetClub has significant long-term potential Our aim is not only to allow practices to benefit from our buying power but also through providing other services such as health and safety expertise and administering loyalty club schemes We have begun to roll out our own brand waiting room retail range and this will be completed during Further product launches are planned GROWING OUR SHARE PRICE AND RETURN TO OUR SHAREHOLDERS Market capitalisation was 382.5m (646p per share) at 30 June compared to 190.5m (327p per share) at the previous year end 5

8 CVS OVERVIEW YEAR IN REVIEW ANNUAL REPORT Delivering growth throughout the years Revenue grew by 17% in and like-for-like sales increased by 6.8%. Simon Innes Chief Executive OUR RECENT ACQUISITIONS We added 29 surgeries and one crematorium during the year. A further 8 surgeries have been acquired since the year end. 1. HIGHCLIFFE VETERINARY PRACTICE 28 Jul Ipswich 2. WEST END VETERINARY 5 Aug Edinburgh 3. ANRICH VETS 12 Aug Huddersfield N o surgeries: 2 N o surgeries: 3 N o surgeries: 1 4. BATCHELOR, DAVIDSON AND WATSON 5. WESTMOOR VETERINARY HOSPITAL 6. AYLSHAM VETS 7. TOWNSEND VETERINARY PRACTICE 13 Oct Edinburgh N o surgeries: 2 20 Oct Tavistock N o surgeries: 1 3 Nov Acle N o surgeries: 1 2 Feb Rubery, Bromsgrove and Droitwich N o surgeries: 3 8. WOODLANDS VETERINARY 9. YOURVETS 10. KNOX AND DEVLIN VETERINARY SURGEONS 11. WHITLEY BROOK CREMATORIUM FOR PETS 9 Mar Plymouth N o surgeries: 2 30 Mar Birmingham, Coventry and Essex N o surgeries: 7 30 Mar Whaley Bridge N o surgeries: 1 27 Apr Runcorn Crematorium 12. A CROOKS & PARTNERS VETERINARY SURGEONS 5 May Rotherham & Hackenthorpe N o surgeries: PETHERTON VETERINARY CLINICS 11 May Barry and Cardiff N o surgeries: MARLBOROUGH ROAD VETERINARY CENTRES 27 May Cardiff N o surgeries: 2 OUR TIMELINE Our vision is to be the largest and most comprehensive provider of veterinary services in the UK Company was established First surgery Barton Veterinary Hospital and Surgery, Canterbury First laboratory PHI, Norfolk 50th surgery Harris, Hill and Gibbons, Wiltshire First dedicated equine practice Scott Dunn s Equine Clinic, Berkshire 100th surgery Regans, Manchester Second laboratory Axiom, Devon First crematorium Rossendale Pet Crematorium, Lancashire 150th surgery Marske, Cleveland 6

9 OVERVIEW 2016 OUTLOOK The initiatives we progressed in will serve us well in the future, leading us to expect further growth in all divisions. EXISTING BUSINESS GROWTH THROUGH SELECTIVE ACQUISITIONS Development of referral services Introduction of more own brand products Growth and development of HPC scheme Expansion of e-commerce in the UK and overseas FINANCE Continue to acquire to further strengthen geographical coverage Continue to maintain strong cash flow and healthy balance sheet Large opportunity with only 12% market share in small animal sector Further investment in core business activities Further growth opportunities in large animal and equine sector Significant investment in referral business POST-YEAR END ACQUISITIONS 15. DOVECOTE VETERINARY HOSPITAL 16. ROSEMULLION 17. TORBRIDGE VETERINARY 20 Jul 11 Aug 21 Sep Castle Donington Helston, Penryn and Falmouth Bideford, South Molton and Torrington N surgeries: 1 N surgeries: 4 No surgeries: 3 o o Commenced on-line trading Animed Direct Second crematorium Valley Pet Crematorium, Devon 250th surgery West Mount Vets, Halifax Third crematorium Silvermere Haven, Surrey Fourth crematorium Whitley Brook, Cheshire Third laboratory Greendale, Surrey Major acquisition Pet Doctors Major acquisition YourVets Fourth referral centre Dovecote, Castle Donington 200th surgery Cedar, Hampshire/Dorset 7

10 Dovecote, Castle Donington. Veterinary Practice Division The acquisition of Dovecote and the opening of Lumbry Park will establish CVS as the largest provider of specialist treatment in the UK. Professor John Innes Referrals Director CVS operates 298 surgeries across the UK. The practices trade under locally established brand names. In addition to running practices, the Division has several other innovative services: HPC loyalty scheme; Pet Medic Recruitment, recruiting locums and permanent staff; MiPet own brand products; and MiVetClub buying group, using our buying strength to provide a unique offering to third-party practices. REVENUE EBITDA NO. OF HPC CUSTOMERS 147.5m +16.7% m +15.1% , % , , , , ,000 YourVets, Nuneaton. 8

11 OVERVIEW Finn Pathologists, Norfolk. Laboratory Division Innovation is the most effective way to develop our service. Martyn Carpenter Director of Laboratory Division CVS operates five laboratories covering the UK. 368,000 tests were performed in (: 354,000), of which 266,000 were for third parties. The Division offers biochemistry, haematology, histology, serology and advanced allergy testing. The Division also provides in-house analyser units to all of our practices for simple blood and urine testing. REVENUE EBITDA TESTS 13.1m +23.2% m % , % , , , , ,567 Finn Pathologists, Norfolk. 9

12 Rossendale Pet Cemetery, Lancashire. Crematoria Division The acquisition of Whitley Brook enables CVS to deliver a nationwide service to pet owners. Duncan Francis Director of Crematoria Division CVS operates four crematoria. The Rossendale and Silvermere Haven sites both have pet cemeteries and memorial gardens. The Division expanded its capacity in the year with the strategic acquisition of Whitley Brook, in Cheshire. The Crematoria Division also collects clinical waste from practices. REVENUE EBITDA CREMATIONS 2.6m +63.5% m % , % 15 68, , , , ,091 Rossendale Pet Cemetery, Lancashire. 10

13 OVERVIEW Animed Direct The launch of the Animed France website marks the start of our European roll out programme. Animed Direct sells prescription drugs, non prescription drugs, pet food and other animal-related products via its website. During a website was launched in France. Animed also distributes our own MiPet brand products to our practices. Tracy Martin Animed E-commerce Manager REVENUE EBITDA NUMBER OF CUSTOMERS 10.3m +21.0% m +97.5% , % , , , , ,000 Animed Direct Pharmacy. 11

14 CVS OVERVIEW CHAIRMAN S STATEMENT with Richard Connell ANNUAL REPORT Another record year in all divisions HIGHLIGHTS Revenue grew by 17.0% to 167.3m Like-for-like sales increased by 6.8% Operating profit rose to 9.8m 29 surgeries and one crematorium acquired in Results I am delighted to report an excellent performance by CVS with a record year for revenue and profits in all divisions. Strong organic growth was enhanced by further acquisitions in our Veterinary Practice and Crematoria Divisions. We increased investment in the development of our services, our staff and our premises, and further improved our customer service in all areas. Revenue grew by 17.0% to 167.3m (: 142.9m) and like-for-like sales increased by 6.8% (: 6.9%). Adjusted EBITDA increased by 25.9% to 23.0m (: 18.3m) and adjusted earnings per share ( EPS ) grew by 30.0% to 24.7p (: 19.0p). Operating profit rose to 9.8m (: 7.5m) and cash generated from operations increased to 22.2m (: 20.7m). Business initiatives was a very significant year for acquisitions with 29 surgeries and one crematorium acquired. In total these businesses are expected to generate revenue of 24.0m per annum. As well as a number of acquisitions of a normal scale for CVS, we acquired YourVets, which alone has a turnover of almost 10.0m. YourVets brings with it the skills of opening greenfield locations, which we are keen to utilise. Subsequent to the year end, a further eight surgeries have been acquired including the Dovecote referral centre in Castle Donington. The Group further progressed its strategic priorities and grew like-for-like sales by 6.8% with excellent growth in all areas. Our referrals business grew strongly during the year and the Lumbry Park major multi-disciplinary referral centre will begin trading in October. The recently acquired Dovecote referral practice is a substantial practice in its own right but we will grow it further by feeding into it work that our practices in the vicinity have previously sent to third parties. The launch of our own brand flea and worming treatments was of particular significance. Our own brand label is unique in the veterinary industry and as well as giving us a pricing advantage we expect that it will help to bond our customers to our practices. Our Healthy Pet Club scheme grew by a further 51,000 members over the period and all the out-of-hours businesses established in the last two years grew strongly. After the laboratory results dipped slightly in 2013 due to intense competition, the strong growth in like-for-like sales over the last two years and the introduction of the in-house analyser business have seen profits double in the period. The integration of Silvermere Haven crematorium and the acquisition of Whitley Brook have provided significant impetus to the division. They have allowed us to perform in house all of the crematoria work from our own practices. 12

15 OVERVIEW Our people The Group remains the largest employer in the UK s veterinary profession with approximately 3,400 staff today, including around 822 vets. It is through our people that we have delivered these excellent results for the year and they remain our most important asset. I would like to thank them all, including those new to CVS, for their expertise and professionalism in providing the best possible care and service to all our customers and their pets. The development of our staff and of our clinical and non-clinical training continues to be a priority. No other veterinary group has the knowledge, expertise and ability to provide so much training internally and this is an area where CVS distinguishes itself from its competition. During the year we launched our values and behaviours. They set out how we behave, with our customers, staff and suppliers, rather than just what we do. Our focus on excellent customer service remains a key element. The Group further progressed its strategic priorities and grew like-for like sales by 6.8%. Outlook The outlook for CVS remains very promising. Whilst like-for-like sales growth in the Veterinary Practice Division returned to more normal levels in the second half of the year and has continued at this level into 2016 this still represents a good performance. Other initiatives, such as the benefit of our own brand products and the opening of Lumbry Park, our major multi-disciplinary referral centre, will begin to deliver significant benefits in In addition the acquisition pipeline remains very buoyant. The Board is optimistic about the Group s future. It estimates that CVS only has a 12% share of the UK small animal veterinary market and a negligible share of the equine and large animal veterinary market. This demonstrates the major opportunity for further growth and consolidation and we expect to make further practice acquisitions. Richard Connell Non-Executive Chairman 25 September Dividends It is proposed to pay a dividend of 3.0p per share in December, a 20% increase on the 2.5p per share paid in. With a strong pipeline of acquisitions, as well as significant opportunities for organic growth, the Board believes that shareholder value can best be grown by reinvesting the majority of operational cash flow back into the business. However, the increased scale and growth of our business can also support a meaningful increase in the level of dividend. If approved at the Annual General Meeting, the dividend will be paid on 11 December to shareholders on the register on 27 November. The ex-dividend date will be 26 November. 13

16 CVS STRATEGIC REPORT BUSINESS REVIEW with Simon Innes ANNUAL REPORT Excellent progress on our strategic priorities HIGHLIGHTS Veterinary Practice Division revenue increased 16.7% to 147.5m and EBITDA 15.1% to 25.3m Laboratory Division revenue increased 23.2% to 13.1m and EBITDA 100.4% to 2.2m Crematoria Division revenue increased 63.5% to 2.6m and EBITDA 101.7% to 0.8m Animed Direct revenue increased 21.0% to 10.3m and EBITDA 97.5% to 0.5m Introduction CVS Group is managed across four divisions: Veterinary Practice, Laboratory, Crematoria and Animed Direct, our on-line dispensary and retailer. The Veterinary Practice Division is the core of our business but all areas of the Group made excellent progress towards our strategic priorities during. Divisional EBITDA figures in this section are all now stated net of costs that were previously included in central costs. All comparatives have been restated. Revenue by division 30 June Practices Laboratory 13.1 Crematoria 2.6 Animed Direct 10.3 Intra-Group sales -6.2 Total Group June Practices Laboratory 10.6 Crematoria 1.6 Animed Direct 8.5 Intra-Group sales -4.2 Total Group Veterinary Practice Division Like-for-like revenue acquisitions acquisitions 7.7 Total revenue Adjusted EBITDA EBITDA margin (%) Revenue amounted to 147.5m (: 126.4m), an increase of 16.7% on the prior year. Adjusted EBITDA increased by 15.1% from 21.9m to 25.3m. These increases include the impact of acquisitions in both and. In the year, CVS acquired 29 surgeries operating as 13 practices. These practices contributed 7.7m of revenue and 1.0m of EBITDA in the year. Practices acquired during the year and after the year end are set out on pages 6 and 7. The acquisitions were predominantly of small animal businesses but included some large animal surgeries. Adjusted EBITDA as a percentage of sales fell slightly in the year from 17.4% in to 17.1% in. This was primarily due to the lower EBITDA percentage from the recently acquired YourVets where two sites are relatively immature and therefore have lower profitability. Within the like-for-like businesses, a small fall in the gross margin percentage, from 84.8% to 84.4%, was offset by efficiencies in manpower and overhead costs. Like-for-like sales grew by 5.6% for the year as a whole, with the first half of the year showing exceptional growth but the second half returning to more normal levels. This growth was supported by a number of successful initiatives. The development of our referrals business, and the expertise that this requires, has been and remains a key strategic priority for CVS. During the year we recruited six diploma holders, bringing the total that we now employ to 17. Some of these are based at our existing referral centres whilst others were hired in preparation for the opening of Lumbry Park in October. 14

17 This 13,000 square foot site is a state of the art, major multi-disciplinary referral centre in Alton, Hampshire. It provides a full range of specialisms, using the most modern equipment including both a Computerised Tomography ( CT ) and a Magnetic Resonance Imaging ( MRI ) scanner. Subsequent to the year end we acquired the Dovecote referral centre in Castle Donington. These two new locations provide us with an excellent team and facilities to service our customers needs rather than referring them to specialists outside of CVS. As a medium-term objective we will be seeking other locations around the UK in which to establish further referral centres. In the last quarter of we extended our MiPet own brand range to include high volume flea and worming treatments. We have begun to roll out our own brand waiting room retail range and this will be completed during Further product launches are planned. The own brand range has been well received by both our customers and our staff. MiPet products are available only in our surgeries and to our MiVetClub members and, hence, their introduction differentiates CVS in the market. It both protects our margins and helps us retain our competitiveness by limiting price increases. The Healthy Pet Club loyalty scheme continued its excellent growth in the year. Over 51,000 pets were added to the scheme increasing membership by over 32% and bringing the total membership to 213,000. The scheme provides preventive medicine to our customers pets as well as a range of discounts and benefits. We gain from improved customer loyalty, encouraging clinical compliance, protecting revenue generated from drug sales, and bringing more customers into our surgeries. Monthly subscription revenue generated in the year increased to 18.8m (: 13.9m) and the year-end run rate represented 13.0% of practice revenue. During the year we opened another out-of-hours centre in addition to the four we opened in. This further reduces our reliance on third parties for the 24-hour cover that vets are required to provide to their customers. Satisfying the requirement ourselves significantly improves the experience of our customers and their pets and, except for the most recently opened site, all of our out-of-hours centres are now profitable. We continue to perform out-of-hours work for other veterinary practices and will seek to develop further centres as our growing density in an area makes this effective. The development of our veterinary practice management systems continued during the year. Key data from all practices except the most recent acquisitions is now linked and we can now perform analysis at divisional, rather than just practice, level. This will further improve our understanding and management of the business. We continued to invest strongly in our surgeries, spending over 2.3m on refurbishing and extending a number of premises including Beaumont in Killington, and Nine Mile in Wokingham. We extended the surgery at Twyford in order that animals no longer have to be transported to the main practice site. We will continue to spend significant amounts on developing our estate to provide a welcoming experience for our customers and to generate revenue growth. In addition to refurbishments, we spent 2.4m on equipment in our practices. At Beechwood in Doncaster we have recently installed a CT scanner and will install several more at other locations over the next year. We now have digital x-ray equipment at almost 100 sites. This technology provides substantially quicker results than traditional x-ray and allows us to avoid the use of unpleasant and potentially dangerous chemicals. All this equipment improves our diagnostic capability and our ability to serve our customers in a professional environment. MiVetClub, our buying group, has found it challenging to prise vets away from their existing suppliers and buying groups. However, in recent months we have signed up three new members bringing our total to five. We are in discussions with a number of other potential members. The business continues to add modestly to our profitability and we believe that it has significant long-term potential, not only by allowing practices to benefit from our buying power but also through providing other services such as health and safety expertise and administering loyalty club schemes. Our own recruitment business, Pet Medic Recruitment, has primarily focused on providing locums for the Veterinary Practice Division. This helps to deliver our continuing aims of improving service and reducing costs. The business also provides a small number of locums to third parties and sources permanent staff. Our team within the Veterinary Practice Division will always be one of our most valuable assets and one that we aim to continue to develop. The two essential skills of retail management experience and clinical expertise are combined through our Director of Practice Operations being supported by both our Director of Clinical Services and our Director of Referrals. They are supported by regional and local practice managers. Many of the regional managers are vets with many years experience of operating in practice. We continually aim to improve our staff training and career opportunities and in January we launched our Nurse Academy. This provides nurses with advanced training in one of four areas: medicine, surgery, emergency and critical care, and clinical nursing. It is designed to fill a gap which exists across the profession in the post-qualification training of nurses. Our vet graduate training scheme continues to grow and 106 graduates have gone through the scheme in the past two years. The scheme is designed to assist newly qualified vets in making the challenging transition from university to day-to-day practice. Clinical development remains a core aspect of our training. All of our vets and nurses are provided with a wide range of training on surgical procedures, nutrition and drugs both through in-house expertise and external courses. We also sponsor further qualifications for vets such as certificates and diplomas. Increasingly this training is carried out in house by our own experts. Laboratories Revenue Adjusted EBITDA EBITDA margin (%) The Laboratory Division generated revenue of 13.1m, a 23.2% increase on the prior year figure of 10.6m. Adjusted EBITDA doubled from 1.1m to 2.2m. STRATEGIC REPORT 15

18 CVS STRATEGIC REPORT BUSINESS REVIEW Continued ANNUAL REPORT Laboratories continued Like-for-like revenue in the laboratory diagnostics business increased by 10.7% following a similar increase in the previous year. The growth in the analyser business reflected the rollout of the analysers across the whole CVS estate as well as a few external sales. Now that the internal rollout is complete the development of external sales will be an increasing focus. Despite the growing analyser business having a lower gross margin percentage than the laboratory diagnostics business, the gross margin percentage for the division rose significantly from 75.2% to 80.6%. This reflected some easing in price pressures and success in encouraging customers to perform more tests. Overall EBITDA as a percentage of sales showed substantial growth from 10.5% to 17.0%, reflecting the margin improvement and the operational efficiencies gained from the substantial increase in revenue. Crematoria Like-for-like revenue Acquisitions Total revenue Adjusted EBITDA EBITDA margin (%) The Crematoria Division delivered revenue of 2.6m (: 1.6m), an increase of 63.5%. Like-for-like sales were 11.8% higher, the increase being generated across all aspects of the business: from CVS own practices, other veterinary practices and customers visiting the crematoria themselves. The increased revenue from acquisitions was primarily at Silvermere Haven, which had a full year of trading in but only five months in. In addition, Silvermere Haven took on more crematoria and waste collection work from CVS practices. Adjusted EBITDA doubled to 0.8m. EBITDA as a percentage of sales improved from 24.0% to 29.6% as the leverage of the increased level of revenue took effect. The Crematoria Division now carries out all of the work for our own practices except for a few recent acquisitions. The recent acquisition of Whitley Brook crematorium frees up some capacity at Rossendale and provides some efficiency through reduced transport costs. The extension of our geographic spread of crematoria across the UK remains a strategic priority. Animed Direct Revenue Animed Direct, our on-line dispensary and retailer, had another good year. Revenue was 10.3m, a 21.0% increase on the prior year figure of 8.5m. Adjusted EBITDA increased from 0.3m to 0.5m. The business focuses on prescription and non-prescription medicines where the Group s buying power allows it to be extremely competitive. The business now has a customer database of over 322,000 people. The average value of each purchase during the year was (: 29.91). Sales in the first half of the year were very strong but growth was minimal in the second half because a major internet search engine, without explanation, cut off its shopping feed. This was restored just before the year end but sales growth will take some time to pick up. In April the business launched its first local language website in French and selling in Euros. This was delayed initially due to the plethora of different regulations and medicine licences across Europe and then because of legal challenges about selling drugs on-line in France. All these obstacles have been overcome and in doing so we have learnt a lot that will help us as we plan further European sites. Revenue from the French site is modest and these European sales are not initially expected to generate any additional profit as we broadly aim to break even in the first few years of trading. Central administration Central administration costs include those of the central finance, IT, human resources, purchasing, legal and property functions. Total costs were 5.8m (: 5.4m), representing 3.5% of revenue (: 3.8%). The continued growth and development of the Group have required increased costs to support it and to establish a firm foundation for growth over the next few years. All functions have taken on additional staff to assist with the integration of acquisitions and the ongoing management of the enlarged business. Focus has remained on developing our support systems to continue to improve efficiency and effectiveness. The resilience of our IT systems has been improved, our intranet was launched during the year and our new Group website was launched just after the year end. Budgeting and analysis systems have been further developed and we have recently begun several initiatives to introduce self-service functions on our payroll and human resources systems. The increased scale of our support functions necessitates the move to a larger head office and this move is expected to take place in October. In due course we will move Animed Direct onto the same site. Simon Innes Chief Executive 25 September Adjusted EBITDA EBITDA margin (%)

19 STRATEGIC REPORT ANNUAL REPORT KEY PERFORMANCE INDICATORS CVS Strong results The Directors monitor progress against the Group s strategy by reference to the following financial KPIs. REVENUE 167.3m Definition Total revenue of the Group. Changes in Acquisitions in the year and the full-year impact of the prior year s acquisitions generated additional revenue of 22.0m. Other significant factors were as for like-for-like sales performance noted below. STRATEGIC REPORT LIKE-FOR-LIKE SALES PERFORMANCE % 6.8% Definition Revenue generated from all operations compared to prior year on a pro-forma basis (i.e. including unaudited pre-acquisition revenues in respect of acquisitions in the current and comparative periods). Changes in The like-for-like increase reflected strong performances in all divisions. It was helped by the growth in referrals work and HPC membership, the development of Animed Direct and higher volumes in the Laboratory Division. Significant competitive pressures continued at some locations, reducing their revenue. HEALTHY PET CLUB REVENUE % 13.0% Definition Revenue received from HPC members as a percentage of total revenue for the year. Changes in The growth of Healthy Pet Club membership from 162,000 to 213,000 led to the increase for the year. GROSS MARGIN AFTER MATERIALS PERCENTAGE % 82.8% Definition Gross margin after deducting the cost of drugs and other goods sold or used by the business from revenue expressed as a percentage of total revenue. Changes in The marginal fall in this percentage primarily reflects the higher level of growth of Animed Direct and other businesses compared to the Veterinary Practice Division and the lower gross profit margin in practices acquired. As these businesses have a relatively low margin, the Group margin has fallen. 17

20 CVS STRATEGIC REPORT KEY PERFORMANCE INDICATORS Continued ANNUAL REPORT ADJUSTED EBITDA 23.0m Definition Earnings before income tax, net finance expense, depreciation, amortisation and costs relating to business combinations. Changes in A 3.4m increase in adjusted EBITDA in the Veterinary Practice Division and smaller increases in the other divisions have been partly offset by increased central costs incurred to build a foundation for further development of the Group. ADJUSTED EPS 24.7p p Definition Earnings adjusted for amortisation, costs relating to business combinations and non recurring tax credits net of the notional tax impact of the above, divided by the weighted average number of issued shares. Changes in The increase primarily reflects the improvement in adjusted EBITDA CASH GENERATED FROM OPERATIONS 22.2m Definition Cash inflow before payments of taxation and interest, acquisitions, purchase of property, plant, equipment and intangible assets, payments of dividends, debt issue costs, increase/repayment of bank loans and proceeds from issue of shares. Changes in The increase primarily reflects the improvement in EBITDA of the business RETURN ON INVESTMENT ON ACQUISITIONS MADE DURING THE YEAR % 18.7% Definition Annualised adjusted EBITDA relating to acquisitions during the year compared to the consideration paid. Changes in The reduction in Return on Investment ( ROI ) is reflective of the higher average EBITDA multiples being paid for acquisitions

21 STRATEGIC REPORT ANNUAL REPORT PRINCIPAL RISKS AND UNCERTAINTIES CVS Managing our risks The Group s businesses are subject to a wide variety of risks. Some of the most significant risks are explained below together with details of actions that have been taken to mitigate these risks. Risk Description Mitigating factors ECONOMIC ENVIRONMENT A poor economic environment poses a risk to the Group through reduced consumer spending on veterinary, laboratory, crematoria and on-line services. The improvement in the UK economy in the last few years has helped the business to improve revenue and profitability but the Group seeks to become more resilient to future downturns in economic conditions. The expansion of the Group s business to provide a broader-based service including referrals, out-of-hours, equine and large animal services spreads the risk of a downturn in any one business. The Veterinary Practice Division has continued to grow its Healthy Pet Club loyalty schemes during the year as one way of mitigating this risk. The scheme has the significant benefits of stimulating customer loyalty, ensuring clinical compliance in preventive medicine, protecting revenue from drug sales, and bringing customers into the surgery. The further development of an own brand product range will help to reduce the risk of customers buying drugs on-line, whilst the growth of Animed Direct protects the Group further as customers switching to buying on-line will still be buying from CVS. STRATEGIC REPORT COMPETITION The Group is exposed to risk through the actions of competitors. The geographic spread of the Group s businesses and the fragmented nature of the market help mitigate this risk. Furthermore, the expansion of the Group s Healthy Pet Club loyalty schemes, the expansion into other business areas and the growth of Animed Direct, our on-line dispensary and pet shop, provide further mitigation against the risk of competition. ADVERSE WEATHER In common with many businesses the Group s revenue is adversely affected during sustained periods of severe winter weather. The increasing proportion of income through the Healthy Pet Club and on-line through Animed Direct reduces the risk of lost income through poor weather. As the Group widens its geographical presence the exposure to this risk will be further mitigated. KEY PERSONNEL The Group has limited risk in relation to the ability to attract and retain appropriately qualified veterinary surgeons. The Group is committed to the development of its employees and will continue to recruit specialist and qualified professionals to promote its services. Our graduate recruitment scheme is recognised across the industry and our Aspirational Leadership Programme helps to develop and retain senior staff. The involvement of senior personnel is encouraged through the operation of the Group s Long Term Incentive Plan ( LTIP ). An annual Save As You Earn ( SAYE ) scheme, available to all staff, aids the retention of other staff. 19

22 CVS STRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES Continued ANNUAL REPORT Risk Description Mitigating factors CLINICAL STANDARDS If clinical standards expected by customers, industry forums and regulatory authorities are not maintained the Group is at risk of losing revenue. The Group has established a formal organisation structure such that clinical policies and procedures are developed by veterinary experts. Day-to-day monitoring and staff training ensures compliance. The Group has further mitigated risk by ensuring that suitable insurance policies are taken out at both an individual and a corporate level. ADVERSE PUBLICITY Adverse publicity could result in a reduction in customer numbers and in revenue. The Group has policies and procedures in place to ensure that high standards of customer service and clinical excellence are maintained. The individual branding of our practices reduces the risk of publicity at one practice impacting on another. CHANGES IN VETERINARY REGULATIONS Changes in veterinary regulations could impact on the work we are allowed to perform and the way we work. No significant proposed changes are known. Any changes are likely to impact our competitors in the same way they impact the Group. CHANGES IN TAXATION Most changes in taxation cannot be predicted and the impact of any change can be variable. The only change in taxation that has been proposed and impacts on the Group is a reduction in the corporation tax rate from 20% to 19% from 1 April 2017 and to 18% in This will benefit the Group. Changes in taxation are likely to impact our competitors in the same way they impact the Group. RELIANCE ON ONE SUPPLIER OF MEDICINES The majority of medicines are purchased through one wholesaler. A two-year supply agreement was signed in April to secure the provision of medicines. Three wholesalers can supply most medicines; hence, supply is available if the existing CVS wholesaler were to withdraw. CVS also has direct relationships with many manufacturers which would enable direct supply should any difficulties occur. 20

23 STRATEGIC REPORT ANNUAL REPORT FINANCE REVIEW with Nick Perrin CVS Further growth in EBITDA and a healthy balance sheet HIGHLIGHTS Adjusted EBITDA increased from 18.3m to 23.0m Cash generated from operations was 22.2m Adjusted EPS increased to 24.7p Financial highlights CVS has continued to deliver growth in revenues, profits and earnings per share. Key financial highlights are shown below: Change % Revenue () Adjusted EBITDA () Adjusted profit before tax () Adjusted earnings per share (p) Operating profit () Profit before tax () Basic earnings per share (p) STRATEGIC REPORT Management uses adjusted EBITDA and adjusted EPS as the basis for assessing the underlying financial performance of the Group. These figures exclude certain non-recurring and non-trading items and hence assist in understanding the underlying performance of the Group. These terms are not defined by International Financial Reporting Standards and therefore may not be directly comparable with other companies adjusted profit measures. An explanation of the difference between the reported operating profit figure and adjusted EBITDA is shown below: Operating profit as reported Adjustments for: Amortisation and depreciation Costs of business acquisitions Adjusted EBITDA The 4.7m (25.9%) improvement in the adjusted EBITDA figure compared with the prior year arises primarily from the underlying growth within the Veterinary Practice Division ( 1.0m) and the Laboratory Division ( 1.1m), acquisitions during the year ( 1.0m) and the full-year effect of prior year acquisitions ( 1.4m) offset by an increase in central administration costs ( 0.4m). Adjusted EBITDA as a percentage of revenue (adjusted EBITDA margin) increased from 12.8% in to 13.8%. This primarily reflects increased margins in the Laboratory, Crematoria and Animed Direct Divisions. Adjusted earnings per share (as defined in note 11 to the financial statements) increased 30.0% to 24.7p (: 19.0p). Basic earnings per share was 39.8% higher than the prior year at 11.6p (: 8.3p). 21

24 CVS STRATEGIC REPORT FINANCE REVIEW Continued ANNUAL REPORT The Group has generated consistent growth in the scale of its business and profits over recent years Financial highlights continued Profit before tax for the year increased from 6.3m to 8.5m. Adjusted profit before tax excludes the impact of amortisation of intangible assets and one-off transaction costs. We believe this more fairly reflects the underlying performance of the business and shows a 28.6% increase in the year from 14.3m to 18.2m. Long-term growth The Group has generated consistent growth in the scale of its business and profits over recent years. A summary of the compound annual growth rates ( CAGR ) over the past five years in key financial figures is as follows: 2010 CAGR % Revenue () Adjusted EBITDA () Adjusted profit before tax () Adjusted earnings per share (p) Cash flow and net debt Cash generated from operations was 22.2m (: 20.7m). The increase reflects the growth in EBITDA. Net debt increased by 14.9m to 46.2m (: 31.3m) largely as a consequence of higher acquisition activity and continued investment in the business. The movement in net debt is explained as follows: Cash generated from operations Capital expenditure (6.5) (5.3) Taxation paid (2.3) (2.5) Interest paid (1.3) (1.2) Free cash flow Acquisitions (25.3) (12.4) Proceeds from Ordinary shares Dividends paid (1.5) (1.1) Debt issuance costs (0.5) Increase in net debt (14.9) (1.3) Cash available for discretionary expenditure ( free cash flow ) increased from 11.7m to 12.1m. Capital expenditure included 2.3m spent on the refurbishments across the Group, 1.2m on the development of Lumbry Park, 1.4m on maintaining and improving equipment, 0.6m on laboratory analysers, 0.6m on IT systems development, 0.2m on vehicles and 0.2m on land and property. 22.8m was paid for the 29 surgeries and one pet crematorium which were acquired during and 2.5m of loan notes were issued as part of the consideration for the YourVets acquisition. 1.7m related to the repayment of bank loans inherited with the acquisition of YourVets. The acquired businesses have been integrated into the Group and are trading as expected. Taxation paid increased in line with the profits of the Group. The interest payment of 1.3m was similar to last year and reflects both stable interest rates and the overall debt levels of the Group. Proceeds from Ordinary shares were primarily from the exercise of options under the Group s approved SAYE scheme which allows staff to save regular amounts each month over a three-year period and benefit from increases in the Group s share price over that time. 0.5m debt issuance costs were paid to the Group s existing lender following the agreement of an increased bank facility. The Group s net debt comprises the following: Borrowings repayable: within one year after more than one year Total borrowings Cash in hand and at bank (3.0) (2.2) Net debt The 49.2m of borrowings is principally the 31.7m term loan (net of unamortised issue costs), 15.0m Revolving Credit Facility ( RCF ) and 2.5m loan notes issued in respect of the YourVets acquisition. The term loan is repayable in one bullet payment in 2017 and the loan notes are repayable in On 28 March the Group entered into a new bank facility with its existing lender. These facilities replaced the existing bank loan arrangements on more favourable terms, including a lower interest rate. The facilities comprise the following elements: a fixed term loan of 32.0m, repayable on 27 January 2017 via a single bullet repayment; a five-year RCF of 48.0m that runs to 27 March 2020; and a 5.0m overdraft facility renewable annually. The facility provides an option for the Group to refinance the repayment of the 32.0m fixed term loan through an additional RCF. The two main financial covenants associated with the Group s bank facilities are based on Group borrowings to EBITDA and Group EBITDA to interest ratios. 33.0m of the RCF remained unutilised at 30 June but is available to fund business development including further acquisitions. The Board remains committed to expanding the Group through further acquisitions in all divisions, as well as through organic growth. The opportunities for acquisitions in all areas of the Group s business remain strong. 22

25 The Board considers that maintaining a reasonably leveraged balance sheet is appropriate for the Group, given the strong, stable and improving nature of its cash flows and the opportunities to acquire businesses that enhance profitability. The loan agreements allow a borrowings to EBITDA ratio of up to 3.0 times. Given the relatively high free cash flow of the Group, the Board is comfortable with operating at close to this level. The Group manages its banking arrangements centrally. Funds are swept daily from its various bank accounts into deposit accounts to optimise interest generation. Interest rate risk is also managed centrally and derivative instruments are used to mitigate this risk. The bank facility agreement requires that at least 60% of the interest rate exposure on the term loan is hedged and the hedge has been maintained at approximately 60% throughout the year. Taxation The Group s effective tax rate was 20.1% (: 24.5%). The principal reason for the significant decrease is the change in the standard taxation rate. A reconciliation of the expected tax charge at the standard rate to the actual charge in millions of pounds and as a percentage of profit before tax is shown below: Profit before tax 8.5 % Expected tax at standard rate of tax Expenses not deductible for tax Adjustments to prior year tax charge (0.2) (2.8) Benefit of tax rate change (0.2) (1.1) Actual charge/effective rate of tax All of the Group s revenues and the majority of expenses are subject to corporation tax. The main expenses which are not deductible for tax are costs relating to acquisitions. Tax relief against some expenses, mainly depreciation, is received over a longer period than that for which the costs are charged in the financial statements. The tax charge has increased 0.2m on the previous year despite an increase in profitability of 2.2m. This is due to the tax on the increased profit being partially offset by the reduction in the standard rate of corporation tax which not only reduces the corporation tax charge for the year but has led to a one-off reduction in the deferred tax liability to reflect the reduced rate. Share price performance At the year end the market capitalisation was 382.5m (646p per share) compared to 190.5m (327p per share) at the previous year end. The graph below shows the total shareholder return performance compared to the FTSE AIM All-Share Index. The values indicated in the graph show the share price movement based on a hypothetical 100 holding in Ordinary shares from 1 July 2010 to 30 June July July July July July 1 July Key contractual arrangements The Directors consider that the Group has only one significant third-party supplier contract which is for the supply of veterinary drugs. In the event that this supplier ceased trading the Group would be able to continue in business without any disruption in trading by purchasing from alternative suppliers. Forward-looking statements Certain statements in this Annual Report are forward looking. Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. Nick Perrin Finance Director 25 September CVS FTSE AIM All-Share STRATEGIC REPORT Impact of increase to the National Living Wage ( NLW ) The summer budget increased the NLW from 6.50 to 7.20 per hour for workers aged over 25, effective from April The change in legislation also increased the national minimum for apprentices, workers aged and workers aged The after-tax impact on the Group s profit is 0.3m; however, the potential impact of maintaining salary differentials has not been quantified. The Strategic Report on pages 2 to 23 was authorised by the Board of Directors on 25 September and was signed on its behalf by: Nick Perrin Finance Director 25 September 23

26 CVS GOVERNANCE BOARD OF DIRECTORS ANNUAL REPORT A strong leadership team 1 1. RICHARD CONNELL (60) Non-Executive Chairman A N R 4. NICK PERRIN (55) Finance Director 2 3 Richard Connell is a Chartered Accountant and worked in investment management with 3i Group, Invesco and HSBC. In addition to his role with CVS, he is chairman of a number of other companies and was previously chairman of Dignity plc, Mercury Pharma and Ideal Stelrad Group. Richard is Chairman of the Audit Committee and the Nominations Committee. 2. SIMON INNES (55) Chief Executive Simon Innes was appointed as Chief Executive in January Prior to this he was chief executive of Vision Express from 2000 to 2004, over which time he built the business up to 220m turnover and 205 practices, and reversed a loss-making position to create one of the most profitable corporate optical operators in the UK. Prior to Vision Express, Simon was on the board of Hamleys as operations director and gained ten years management experience at Marks & Spencer. He also served seven years in the British Army, achieving the rank of Captain in the Royal Engineers. Nick Perrin was appointed as Finance Director in January He has extensive experience in multi-site retail and service businesses. During 2012 Nick was interim chief financial officer at Praesepe plc, a leading UK bingo and gaming centre operator and from 2008 to 2010 was finance and IT director at Genting UK plc, which operated the largest number of casinos in the UK. He previously spent nine years at The Co-operative Group, initially as group financial controller and then as finance director of the Specialist Retail division. 5. REBECCA CLEAL (34) Company Secretary Rebecca Cleal joined CVS in July 2009 as the Group s first in-house solicitor, specialising in commercial property. Prior to this she worked for three years in private practice in both Kent and Norfolk. Rebecca has a master s degree from the University of Kent and was appointed as Company Secretary on 1 January KEY 4 3. MIKE McCOLLUM (48) Non-Executive Director Mike McCollum is chief executive officer of Dignity plc, a FTSE 250-listed provider of funeral services. Like CVS this is a multi-site, acquisitive service business. As finance director he was a prime mover in the 2002 leveraged buyout, the whole-business securitisation in 2003 and the IPO in He became chief executive in Mike is a solicitor and holds an MBA from the University of Warwick. He is Chairman of the Remuneration Committee. A N R A R N Chairman Member Audit Committee Remuneration Committee Nominations Committee 5 24

27 GOVERNANCE ANNUAL REPORT CORPORATE GOVERNANCE STATEMENT CVS Complying with corporate governance best practice REBECCA CLEAL Company Secretary Principles of corporate governance The Directors are committed to maintaining high standards of corporate governance and, as far as is considered practicable and appropriate for a public company of CVS size, seek to apply the principles of good governance set out in the UK Corporate Governance Code issued in September However, we do not fully comply with the UK Corporate Governance Code but we have reported on our corporate governance arrangements by drawing upon best practice available, including those aspects of the UK Corporate Governance Code we consider to be relevant to the Company, even though it is not compulsory for AIM-listed companies. Board of Directors The Board of Directors consists of four members, including a Non-Executive Chairman and a Non-Executive Director. The business of the Company and its subsidiaries is the combined responsibility of the Board, which is responsible for controlling and leading the Group. The Board s responsibilities include: setting the strategy of the Group and making major strategic decisions; approving other significant operational matters; All Directors are able to take independent professional advice on the furtherance of their duties if necessary. They also have access to the advice and services of the Company Secretary, and, where it is considered appropriate and necessary, training is made available to Directors. All Directors receive updates on the duties and responsibilities of being a Director of a listed company. This covers legal, accounting and tax matters as required. The Company maintains appropriate insurance cover in respect of any legal action against its Directors. The level of cover is currently 20.0m for any one claim. Both the Chairman, R Connell, and M McCollum have been independent Non-Executive Directors throughout the year and the Board identifies M McCollum as the Senior Independent Non Executive Director. Mindful of their other commitments they have formally confirmed to the Board that they have sufficient time to devote to their responsibilities as Directors of the Group. The Board has appointed three Committees: the Audit Committee, the Remuneration Committee and the Nominations Committee. All operate within defined terms of reference. Details of the Committees are set out below. GOVERNANCE agreeing annual budgets and monitoring results; THE AUDIT COMMITTEE monitoring funding requirements; reviewing the risk profile of the Group and ensuring adequate internal controls are in place; approving all acquisitions and major capital expenditure; and proposing dividends to shareholders. The Committee consists of two Non-Executive Directors, R Connell and M McCollum. R Connell is a Chartered Accountant and M McCollum has worked previously as the CFO for a FTSE 250 business. The Board considers that both members of the Audit Committee have significant financial expertise. Those attending and the frequency of Board and Committee meetings held in the financial year were as follows: Board Audit Committee Remuneration Committee Nominations Committee Number of meetings R Connell S Innes 10 2* 2* 1* N Perrin 10 2* 2* 1* M McCollum * In attendance by invitation of the respective Committee. 25

28 CVS GOVERNANCE CORPORATE GOVERNANCE STATEMENT Continued ANNUAL REPORT THE AUDIT COMMITTEE continued The Audit Committee s duties primarily concern financial reporting, internal control and risk management systems, whistle-blowing procedures, internal audit and external audit arrangements (including auditor independence). The Committee is responsible for ensuring that the financial performance of the Group is properly monitored and reported on, for meeting with the external auditors and for reviewing their reports relating to financial statements and internal control matters. The Chief Executive and the Finance Director are invited to attend such meetings, but the Committee also meets with the auditors without the Chief Executive and the Finance Director being present at least once annually. Other members of management are invited to present such reports as are required for the Committee to discharge its duties. The agenda of each meeting is linked to the reporting requirements of the Group and the Group s financial calendar. Each Audit Committee member has the right to require reports on matters relevant to its terms of reference in addition to the regular items. In the year ended 30 June and up to the date of this report the actions taken by the Audit Committee to discharge its duties included: reviewing the Annual Report and financial statements and the Interim Report issued in March. As part of these reviews the Committee received a report from the external auditors on their audit of the annual financial statements; reviewing the effectiveness of the Group s internal controls and disclosures made in the Annual Report and financial statements; meeting with the external auditors, without management being present, to discuss any issues arising from the audit; agreeing the fees to be paid to the external auditors for their audit of the financial statements; considering the need for an internal audit function; and reviewing the performance and independence of the external auditors. The Audit Committee has a programme for reviewing its effectiveness. THE REMUNERATION COMMITTEE The Chairman of the Remuneration Committee is M McCollum and its other member is R Connell. It reviews the performance of Executive Directors, sets the scale and structure of their remuneration and reviews the basis of their service agreements with due regard to the interests of the shareholders, utilising the services of external consultants as appropriate. The Remuneration Committee also makes recommendations to the Directors concerning any long-term incentive plans including the award of share options to Directors and senior employees; it also reviews the ongoing appropriateness and relevance of the Company s remuneration. The Chief Executive and Finance Director are invited to attend meetings as appropriate but are not permitted to participate in discussions relating to their own remuneration. The Remuneration Committee Report can be found on pages 28 to 31. THE NOMINATIONS COMMITTEE The Chairman of the Nominations Committee is R Connell and its other member is M McCollum. It meets at least once annually. The Nominations Committee is responsible for reviewing the structure, size and composition including skills, knowledge and experience of the CVS Board. It is also responsible for the co-ordination of the annual evaluation of the performance of the Board and of its Committees. It is responsible for making recommendations to the CVS Board on all CVS Board appointments and on the succession plans for both Executive Directors and Non-Executive Directors. Relations with shareholders Copies of the Annual Report and financial statements are issued to all shareholders and copies are available on the Group s website ( The Group also uses its website to provide information to shareholders and other interested parties. The Company Secretary also deals with correspondence as and when it arises throughout the year. At the Annual General Meeting the shareholders are entitled to raise questions and queries, and the Chairman along with the Chief Executive and other Directors are available before and after the meeting for further discussions with shareholders. The Chief Executive and the Finance Director have regular meetings with institutional investors, private client brokers, individual shareholders, fund managers and analysts to discuss information made public by the Group. The Chairman and the Non-Executive Directors are always available to shareholders on all matters relating to governance and strategy. They may be contacted through the Company Secretary at company.secretary@cvsvets.com. Internal control The Board is ultimately responsible for the Group s system of internal control and for reviewing its effectiveness on an ongoing basis. The system is designed to manage rather than eliminate the risk of failure to achieve the Group s strategic objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss. 26

29 The key risk management processes and internal control procedures include the following: the close involvement of the Executive Directors in all aspects of the day-to-day operations, including regular meetings with senior staff from across the Group and a review of the monthly operational reports compiled by senior management; clearly defined responsibilities and limits of authority. The Board has responsibility for strategy and has adopted a schedule of matters which are required to be brought to it for decision; a comprehensive system of financial reporting, forecasting and budgeting. Detailed budgets are prepared annually for all parts of the business. Reviews occur through the management structure culminating in a Group budget which is considered and approved by the Board. Group management accounts are prepared monthly and submitted to the Board for review. Variances from the budget and the prior year are closely monitored and explanations are provided for significant variances. Independent of the budget process, the Board regularly reviews revised profit, cash flow and bank covenant compliance forecasts which are updated to reflect actual performance trends; a continuous process for identifying, evaluating and managing significant risks across the Group together with a comprehensive annual review of risks which covers both financial and non-financial areas; and a central team that checks clinical, health and safety compliance in all parts of the Group. The Board is committed to maintaining high standards of business conduct and ethics, and has an ongoing process for identifying, evaluating and managing any significant risks in this regard. The internal control procedures are delegated to the Executive Directors and senior management and are reviewed in the light of the ongoing assessment of the Group s significant risks. Going concern At the balance sheet date the Group had cash balances of 3.0m and an unutilised overdraft facility of 5.0m. A 48.0m Revolving Credit Facility was signed on 28 March, of which 15.0m was utilised at the year end. Since the year end, the Group has continued to trade profitably and to generate cash. Although the Group had net current liabilities of 20.3m at 30 June, the Directors consider that the 5.0m overdraft and the 48.0m Revolving Credit Facility enable them to meet all current liabilities when they fall due. After consideration of market conditions, the Group s financial position (including the level of headroom available within the bank facilities), its profile of cash generation and the timing and amount of bank borrowings repayable, the Directors have formed a judgement at the time of approving the financial statements that both the Company and the Group have adequate resources available to continue operating in the foreseeable future. For this reason, the going concern basis continues to be adopted in preparing the financial statements. By order of the Board Rebecca Cleal Company Secretary 25 September GOVERNANCE Internal audit The Audit Committee has reviewed the key risk management processes and internal control procedures described above and is satisfied that the processes and controls currently in place are appropriate for a public company of CVS size. As a consequence, the Audit Committee is of the opinion that there is currently no need for an internal audit function, but they will continue to consider this going forward. 27

30 CVS GOVERNANCE REMUNERATION COMMITTEE REPORT ANNUAL REPORT Linking remuneration to performance MIKE McCOLLUM Chairman of the Remuneration Committee As an AIM-quoted company, the information provided is disclosed to fulfil the requirements of AIM rule 19. CVS Group plc is not required to comply with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations The information is unaudited. Remuneration policy Remuneration policy in respect of Executive Directors is designed to ensure that the Group achieves its potential and increases shareholder value. In respect of basic salary, the objective is to ensure that the Group attracts and retains high calibre executives with the skills, experience and motivation necessary to direct and manage the affairs of the Group. Annual bonuses and long-term incentive plans are seen as an important part of each Director s total remuneration and are designed to drive and reward exceptional performance. The policy also provides for post-retirement benefits through contributions to Executive Directors personal pension schemes, together with other benefits such as a company car and life and medical insurance. The Remuneration Committee reviews the policy in light of market conditions, performance and developments in good corporate governance. Remuneration consists of the following elements: Base pay Executive Directors base pay is designed to reflect the experience, capabilities and role within the business. Salary levels are reviewed annually and are benchmarked against similar listed companies. Annual bonus All Executive Directors participate in the Group s annual bonus scheme, which is based on the achievement of adjusted EBITDA performance. This is intended to align management incentives with shareholders objectives. The bonus is awarded up to a maximum of 100% of base pay for the Chief Executive and 50% of base pay for the Finance Director. Pension and other benefits The Chief Executive also participates in a defined contribution pension arrangement. The Finance Director participated in a defined contribution pension arrangement up until 31 March when this was replaced by a payment in lieu of a pension. Both Executive Directors participate in other benefits, including the provision of a company car and medical and life insurance. Long Term Incentive Plan ( LTIP ) Both Executive Directors and certain other senior employees are entitled to be considered for the grant of awards under the LTIP. After due consideration, the Remuneration Committee makes awards to selected participants. The awards take the form of nominal cost options over a specified number of Ordinary shares. Awards are not transferable or assignable. The Long Term Incentive Plan rewards the future performance of the Executive Directors and certain other employees by linking the size of the award to the achievement of Group performance targets. 28